Good morning, and welcome to the Q1 2016 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 6 by dialing 719-457-0820. The replay passcode is 366 4816. The replay may also be accessed through May 28 at the company's website. This conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance.
For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements. You're hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to update publicly any forward looking statements whether as a result of new information, future events or otherwise.
As a final note before we begin, we welcome your questions today, but ask in fairness to all that you limit yourself to just a couple of questions at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks, I'd like to turn the conference over to the company's Vice Chairman and Chief Executive Officer, Mr. David Congdon. Please go ahead, sir.
Good morning, and thanks for joining us today for our Q1 conference call. With me this morning is Adam Satterfield, our CFO. And after some brief remarks, we'll be glad to take your questions. Q1 of 2016 was a period of mixed results for Old Dominion. From a headline standpoint, slower top line growth and increased operating expenses resulted in an increase of 80 basis points in our operating ratio and a $0.01 decline in our earnings per diluted share.
It was still a good quarter though given the challenging environment and a comparison against our record Q1 results in 2015. After a tough Q4 of 2015, we were encouraged by the sequential growth in tons per day of 2.2% in January as compared with December, which was slightly above the 10 year average. February March were not as strong as we would have liked And as a result, our tons per day for the quarter decreased 3.3% as compared to the Q4 of 2015. Note that the tons per day for the Q1 of 2016 was negatively impacted by Good Friday occurring in March this year as compared to April in 2015. As you know, our long term record of margin expansion has been built on increasing freight density and yield, which generally requires a positive macro economic and pricing environment.
1.2% year
over year increase
in our tons per day reflects the sluggish macro environment and does not help much with freight density given the significant investments we have made in capacity. While we didn't gain a significant amount of density in the quarter, we were able to improve our platform productivity with a nearly 6% increase in platform shipments per hour and a 2.7% increase in platform pounds per hour. Our pickup and delivery productivity metrics were also consistent with the Q1 of last year. Our line haul laden load average decreased 3.5% as our line haul productivity continued to be negatively impacted by a lower weight per shipment. The other key component to long term margin improvement is yield.
We maintained our price discipline during the quarter and our expectation of achieving 3% to 4% price increases this year has not changed. Revenue per hundredweight excluding fuel surcharges increased 3.8% as compared to the Q1 of 2015. Continued growth in revenue per hundredweight is indicative of a relatively stable pricing environment, although we have recently noted an increase in price competition. This has been primarily at select locations and customer accounts, which you might expect in a slower economy and has not been broad based. Nevertheless, we believe our growth in ability to win market share continues to be based on our ability to deliver total value to our customers by providing superior service at a fair price.
We continued to deliver 99% on time and our cargo claim ratio was 0.37 percent of revenue. We look forward our plan in the face of either ongoing macro weakness or a stronger environment is absolutely clear and has not changed. We will continue to provide our clients superior on time claim free service at a fair price. We will maintain our pricing discipline and we will continue to invest in capacity, technology and training and education for our team. These factors all contribute to a value proposition that allows us to keep the promises we make to our customers and their customers every day.
This is focused execution of this fundamental approach to our business has helped us create one of the strongest records of growth and profitability in the LTL industry across the long and the short term and through the full economic cycle. As a result, we are confident in our ability to continue winning market share and in our long term prospects for further profitable growth and increased shareholder value. Again, thanks for joining us today. And now Adam will review our financial results for the Q1 in greater detail.
Thank you, David, and good morning. Old Dominion's revenue was $707,700,000 for the Q1 of 2016, a 1.6% increase from last year. Earnings per diluted share were $0.72 which was a 1.4% decrease from the $0.73 earned in the Q1 of last year. Our operating ratio was 85.9 percent, which was an 80 basis point increase over the Q1 of 2015. Revenue growth for the Q1, which included one extra workday, included a 2.8% increase in LTL tons that consisted of a 6.2% increase in LTL shipments offset by 3.3% decrease in LTL weight per shipment.
In addition, our LTL revenue per 100weight increased 0.3% for the quarter, but this metric continued to be impacted by the significant decline in fuel surcharges. Revenue per hundredweight excluding the fuel surcharges increased 3.8%. David mentioned, we view the pricing environment as relatively stable and have not seen broad based irrational pricing. We continue to believe that maintaining a disciplined approach to pricing is the path to improved profitability for any LTL carrier and given the low margin profile of our industry, pricing should remain firm overall. On a sequential basis, LTL tonnage per day for the Q1 decreased 3.3% as compared to the Q4 of 2015.
This was than our 10 year average sequential trend, which is a 2.2% decrease. Started the quarter with a sequential increase in tons per day for January of 2.2%, which was slightly above the 10 year average change of 2%. February March, however, were both below our long term trends for those periods. We are somewhat cautious with our Q2 based on April's trends. We were expecting April's LTL tons per day to be back above the 10 year average sequential trend of +0.3 percent, which is typical when Good Friday occurs in March.
LTL tons per day for April 2016 as compared to March are currently flattish, however, which is indicative of the challenging environment. On a year over year basis, our month to date LTL tons per day in April have decreased 0.3% as compared with the same period in April of 2015. Our year over year revenue for the 2nd quarter will also continue to be negatively impacted by the declines in fuel surcharges and non LTL revenue. We will provide an update for actual April trends when we file our 10 Q. Our operating ratio for the Q1 of 2016 increased 80 basis points as compared to the prior year quarter.
This increase was primarily a result of an increase in salaries, wages and benefits due to a 6.7% increase in the average number of full time employees and higher benefit costs. Our fringe benefit costs were 34.6% of salaries and wages as compared to 33.1 percent of salaries and wages in the Q1 of 2015 due to increased costs for our group health and paid time off benefits as well as retirement plan costs that are related to the performance of our common stock. We also had an increase in depreciation associated with the long term investments we've made in real estate, equipment and information technology. While the significant decline in fuel surcharges had a deleveraging impact on our expenses, it also accounted for the 200 basis point reduction in operating supplies and expenses that helped offset the previously mentioned items. Full Dominion's cash flow from operations for the Q1 of 2016 totaled $168,400,000 a 2.4% decrease from the prior year quarter.
Capital expenditures were $120,300,000 and we repurchased $44,600,000 of our common stock during the quarter. Completed the quarter with $7,100,000 in cash and cash equivalents, dollars 125,300,000 of total debt and a ratio of debt to total capitalization of 6.9%.
At the
end of the Q1, we have repurchased an additional $13,000,000 of our common stock, which leaves approximately $23,000,000 available for purchase under our previously authorized $200,000,000 repurchase program. Expect to purchase this remaining amount during the Q2 and will seek authorization for a new share repurchase program. We estimate that CapEx for 2016 will total approximately $405,000,000 which
is a
$35,000,000 reduction from the estimate estate and service center expansion projects, dollars 200,000,000 for tractors and trailers and $35,000,000 for technology and other assets. Our effective tax rate for the Q1 of 2016 was 38.4% compared with 38.6% for the Q1 of 2015. We currently expect our effective tax rate to be 38.4% for the remainder of 2016. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
Thank you. And we'll take the first question today from Allison Landry with Credit Suisse. Please go ahead. Good morning. Thanks.
So thinking about the weaker tonnage trends in March and into April, do you think that, that is reflecting sort of a normal lag in the ISM Index? And if you think that's the case, does it feel like maybe we're nearing a bottom here in terms of LTL tonnage consistent with the recent recovery we've seen in the index?
Yes. Allison, that's kind of hard to say. It was encouraging to see the ISM bump back up and historically there has been a lag. So hopefully it means things will turn around a little bit. But we're clearly in a soft economy.
We saw it pretty much throughout 2015, especially so in the 3rd, 4th quarters and the Q1 of this year and going into April. But when we survey our field and our sales force and out in the field, the customer feedback across the board is that it's just generally soft. It's a little bit hard to know what the ripple effect is of the energy sector across the whole nation as well. We've seen a little bit more hard hit in our Gulf Coast regions and Central States regions where we do some energy related business, but it's just generally solved. So we're obviously as hopeful as everyone else that things will turn around and get better.
But if they don't, we're prepared for it.
Okay. And then thinking about, Adam, in terms of the cost increases you saw on the labor line in the Q1, how do we think about those trends on a go forward basis?
Obviously, we don't give trends. Some of the headcount increase that you've seen or that we talked about the 6.7% increase includes where we've changed our drayage model to an employee base model versus our use of owner operators in the past. And so you saw somewhat of a shift from purchase transportation into salaries and wages.
So I
think that we've done a good job. When you look at full time, the number of full time employees that we had at the end of the year that decreased from December to March. So we're doing those things and we're just generally keeping our belts as high as we can when it comes to any discretionary spending across the board. While our revenue levels have been a little softer. But I think that you saw when you look at our depreciation and the increase that we had from Q1 of 2015 to 2016, that's just indicative of the long term investments that we've made in the business and in systems that we think will give us long term strategic advantages going forward from an operating efficiency standpoint and generally having the capacity to grow.
So in the short run, depreciation can be more of a headwind from a margin standpoint when our revenues have just been a little bit softer than we would have liked.
Okay, got it. And just to clarify, in terms of the fringe benefits that were an increased percentage of the total labor line in the Q1, Should we think about sort of the increased costs for group health, etcetera, as being elevated for the balance of the year?
That's a hard one to say. We first saw the increase in our group health calls in the Q4 and it sort of was that aligned with trends that we had seen really for the 1st 3 quarters of last year and working trends as well. So when we're we've spent a lot of time going through that and what's driving the increase right now is just the number of claimants that are filing claims. Our average severity trends have at least in the Q1 have been pretty consistent. But generally when we've seen increases like this when you go back into 2013, we kind of had a period of several quarters with increasing trends.
That has continued. And frankly in April, our group held the payments that we make out every day have continued to be at this sort of similar elevated level. And so we're doing everything we can in terms of looking at reasons why we're having claims filed. And if there are any type of preventative programs, generally the way we think of it is the health and welfare of our employees and their dependents. And so we want to make sure that we're doing all the things we can to make sure that our people are healthy.
Got it. Thank you so much. The next question comes from Chris Wetherbee with Citi. Please go ahead.
Thanks. Good morning. I wanted to touch on the pricing environment. So certainly, you held up well, but you did mention that
you're seeing some issues on the margin.
I guess, maybe 2 questions. 1st, natural trend, if we see volumes stay weak, when would you expect maybe some of these isolated pricing issues to maybe get a little bit wider? And then do you think that there are specific players who may be doing things in order to sustain tonnage or maybe turnaround businesses that could be impact Do you think it's specific players that are just more sort of economically driven?
I'll try I'll take that one, Chris. First of all, our yield is still in line with our expectations for the year at 3.8x and the industry behavior seems relatively good. And when I say relatively, I'm saying relative to what happened in 2008 and 2009. One of the things that I think is a real positive for our industry is the amount of focus that so many of our competitors are putting on technology and dimensioners in particular. That's something that we implemented over a decade ago.
And those dimensioners are really important for accurate costing, a really important tool. And it's good to see the industry looking at that. We see our GRI holding as we would have expected it to and our ability to get contract increases are still in the 3% to 4% range, which is what we expected. So we think the markets really hold the line pretty well on its yield management. We've seen some spotty in any market you will see spotty irrational pricing behavior.
And a lot of it I think is just because the competitor doesn't understand handling characteristics of the freight might put in a price that's just crazy in our view.
Okay. Okay. That's helpful color. And then
when you just think about
sort of the resources of your business relative
to maybe what the tonnage outlook might be, if we stay sort of in the sluggish pattern we've been in at least for the last 2 months. How do you think about what you might need to
do with resources or the
sort of the levers you can pull to kind
of manage the cost side of the equation to match what could be sort of lower tonnage than maybe we've seen the last couple of years?
No, we obviously the labor is the biggest thing to manage and that's what we've been doing and making sure that we're matching our productive labor cost with what our actual volume trends are. Our direct variable cost if you will are somewhere around 60% in the low 60% range. So when you've got those other costs that are generally fixed, some of that is investments that we're making. And again, when you get back to we believe in the fundamentals our business plan and our long term strategy. So we want to make sure that we're continuing to make investments particularly on the real estate side that we've got the network that can handle the long term market share growth that we believe we can win by continuing to deliver best in class service at a fair price.
But some of those other things you just don't want to necessarily go into and thought with sort of a short term way of thinking. But the biggest thing is we'll continue to monitor our labor costs and then we'll continue to look at areas where we do have discretionary spending and make sure that we've got adequate control over those costs.
Okay. That's helpful. Thank you for the time. Appreciate it.
Next is Ravi Shaker with Morgan Stanley.
Thanks. Good morning, everyone. Thanks for the detail in April. I think you said volumes are flat so far. Can you give us a little more color in terms of how weight per shipment and our revenue per hundredweight ex fuel are trending as well?
Yes. Basically, our revenue per hundredweight when you exclude the effect of fuel is generally staying in a similar type of range with where we've been. It's trending around 3%. Weight per shipment continues to be down. We talked about this before that on a sequential basis our weight per shipment is kind of hanging right in there around the 15.45, 15.50 range and we'll continue to have that headwind in the Q2.
So it's trending down in kind of the 1.5% range. But overall, weight per day at least month to date was down 0.3%. And really we anticipated this to when you have Good Friday in March, we anticipated that April would be a little bit stronger than it was. And when I look back at the last times that April was I mean, the Good Friday was in March, your April sequential trend is up for more in the range of 2.5% to 3%. So we're just not seeing that same type of sequential change at this point.
I think that we continue to win share every day. We've had a couple of big customers that we've lost though and so those can have impacts on some of your trends.
Got it. And just looking back, as you said, bigger picture question, how does the current environment compare to, say, 2,009 or maybe past recessions? I mean, obviously, we're not in a recession, but maybe that makes it tougher. And then at what point do you decide to take a deeper hack at costs if the environment does not improve?
In 2,009, our tonnage fell off like 19%. We're nowhere near any kind of a recession like we saw back then. But back to Adam's comments, we manage our labor cost every single day. We've got the systems in place to monitor and crew our docks to match the tonnage that we expect tonnage and shipments we're expecting to come across the dock each day. And we might have pointed I think we pointed out earlier that our dock productivity has improved 6% in terms of I think that's the shipments per hour or the tons per hour.
So we're getting a good productivity. We have reduced our headcount since the fall by roughly 2%, which is good. But honestly, we thought the Q1 would come in stronger than it did, but it did not. And it's clearly from what we've seen so far the macroeconomic environment. We have the systems in place.
We've got the management in place. And we will if we have to cut back more drastically, we will certainly do so.
Great. Thank you.
Next is Brad Delco with Stephens.
Yes. Good morning, David. Good morning, Adam.
Good morning. Good
morning. Dave, how do we think about or maybe this is for Adam. How do we think about maybe back on the salaries, wages and benefits line, the impact of shipments being up 6%, but because of declining weight per shipment, tonnage being more muted. Do you essentially have to employ based on your shipment count, meaning we should see your sorry, your workforce or headcount adjusted according to your shipment count more so than your tonnage?
I believe the answer is yes on that, Brad, because if shippers are shipping a slightly less weight on a shipment, which is what's happening, when we open up the back door of a trailer and have to move shipments across the dock, we're moving them 1 at a time as a shipment. And if the weight on that shipment is £200 less and that turns into $10 or $15 less on that shipment, our cost of moving that shipment across the dock didn't change, but we're getting $15 less. It's kind of like the guys who are pumping oil out of the ground and getting $30 a barrel where they used to get $80 a barrel. Their cost of extracting a barrel of oil out of the ground is what it is. You can't hardly cut back on that cost.
So that is part of the pressure we're seeing on our salaries, wages and benefits line.
Got you. And then maybe just longer term and I know e commerce has been a big topic. I mean, do we think that the industry sort of has to get more intelligent on how to appropriately price some of this lighter weighted shipment? That'd be some of the pricing pressure we're seeing? Or you think it's something more than that?
Pressure that we've seen, I mean, like we've said, it continues to be relatively stable overall and it's just been and like David mentioned earlier, it's been spotty in places, but it seems like it has been more sort of localized with a few accounts maybe in a few locations. So I don't necessarily think that that e commerce in today's environment is necessarily driving any changes. But back to David's point earlier is that as shipment dynamics change, you've got to understand the weight of your shipment, the dimensions of those shipments as well. And we've made investments in dimensioners and competitors are doing the same thing. So with all of the focus on the industry, we think that bodes well for pricing to remain firm and we get back to the point as well that we've made in the past that the industry in general is operating with call it single digit profit margins.
If you're not earning an appropriate return to cover your cost of capital, you're not seeing investments in capacity really other than anyone other than ourselves. And so we think that that will keep pricing somewhat in check. The average makeup of that mid single digit margin is skewed differently in today's environment than it was back in 'six as well. So we think that our sales included, but the carriers that are focused on improving their profitability will continue to be disciplined with their pricing.
That makes sense. And then Adam, just maybe a housekeeping item. Did you give us what March year over year tonnage was? Sorry if I missed that.
March year over year tonnage was tons per day was down 1.6%. Just to clarify too, we don't some carriers may or you may have seen numbers that adjust for Good Friday being a half a day or anything like that. We counted as a full workday. So that was skewed negatively a little bit, but we counted as a full workday.
We'll now go to Matt Brooklier with Long Boat Research. Please go ahead. Matt, your line is open. We're unable to hear you. If you please check your mute button.
Yes. Sorry, mute was on. Good morning. I wanted, Adam, ask another question on headcount. You mentioned the 6.7% increase in headcount this quarter.
Do you have a sense for Do you have a sense for how much of the growth in headcount was related to that change?
Yes. If you sort of back those employees out that we've added, it's probably more in the increases between 4% to 4.5%.
Okay. And then when I guess the change in model was made last year, what when did that take place? I'm just trying to get a sense for when do we lap that? Really more so in the Q4.
We started making some of those changes in the back half of the year. But really you see it more in the Q4 they had about fleshed themselves out.
Okay. And then just going back to pricing, you mentioned that the thing is getting a little bit more competitive was kind of a recent event. Give a sense as to when things potentially took a step down? Was it a mid quarter event? Was it more in March?
I'm just trying to get some more color in terms of when there was a change in the market.
There's not been a change in the market. There has been a competitor that has stepped up some activity of pricing in the market. That's all as far as I'm going with that. But in general, when we are in face of a soft market, all of us, we do business with nearly 90,000 ship unique shippers every month. And all of our LTL competition has pricing in place with those shippers as well.
We're all competing for a lot of the same business. And as we talked about and as you've seen in some of our numbers when we looked at our pricing per 100 way compared to the industry going back to 'eight. We tend to be a higher priced carrier for LTL, but we have a higher value of our service. And that's why shippers have chosen us. But in a soft economy, if there is another carrier that has pricing that's a little cheaper, some shippers will ship some business to a cheaper carrier, but that does not necessarily mean that someone came in and cut prices.
It's just the price is what it is and it's been that way. So it's not really a competitive pricing thing where somebody is coming out and trying to cut prices to get our business.
Okay. So it sounds like specific actions that one carrier took was a little bit more impactful here, albeit obviously the macro is not great, but it sounds like it was the spottiness they've been isolated 1 or maybe a couple of carriers. Okay. Appreciate the time.
We'll now go to David Ross with Stifel. Please go ahead. Yes. Good morning, gentlemen.
Hi, David. David, in looking through the stats,
the intercity miles were up almost 9%, which seemed a little high given even where shipments were and length of the whole was. Any commentary around that and what might be going on there with the network?
Good question. I have no earthly idea. Adam, do you have any? Yes.
I mean some of that is last year we were still using a little bit of purchased transportation
within Will this be part of the drayage in the inner city market?
No, just in general. Some of the purchase transportation we were using within our own line haul network. And so as we continue evaluate our use and we've essentially eliminated for the most part any use of purchase transportation within our own line haul. But we continue to evaluate schedules every day and look within our line haul operations to make sure that we're given the best on time service, but there are lane transit times or as quick as they need to be as well to even improve service. So I think that when we look through line haul, we mentioned that our laden load average has trended down, which has somewhat impacted by the decrease in weight per shipment as well.
But that's an opportunity as weight per shipment normalizes and just increase in again revenue and density, that's an area of improvement that we can stay focused on as we progress through the year.
That's a good point Adam because we were really focused in the Q4 of '14 and the Q1 of 'fifteen on getting rid of purchased transportation and shifting our West Coast rail operation to company trucks and even more so reducing PT went into this year.
And then on the CapEx side, you guys are still buying more trucks and trailers than almost anyone right now. Given the softness in the production, are you guys able to get any better pricing on the trucks and trailers you're going to be bringing on in 2016? Most of our orders were already in. And like many things that the pricing we get I think is pretty fair and when we're consistently buying units year in and year out, I think that that would get fair pricing in any given period. But we are bringing in equipment.
We brought that number down a degree we went through and looked at the number of units that we could cut out that we weren't already obligated to without any type of penalty. And so that was a piece of that $20,000,000 decrease in the tractor and trailer CapEx to really be more consistent with what the replacement factor needs to be, but what current volume trends are as well. And buying year in and year out, it keeps your fleet age sort of consistent or continuously improving, which helps on our maintenance cost per mile as well. And if you make significant changes in 1 year or the next really that can create a bubble within your own buying down the road, which we think frankly is somewhat the industry may be dealing with that same type of factor. But we can always bring in equipment and get rid of maybe some of the older power units in particular that really we've put the miles on.
John Barnes with RBC Capital Markets is next.
Hey, thank you. Hey, just one quick question. So just back on the pricing
for a second. During the quarter, it seemed like there was a little bit of a bifurcation in pricing that you kept hearing from the carriers themselves, the pricing with the shippers seemed to be still pretty firm and there was no irrational activity. Yet on the 3PL side, it sounded like it was much more competitive in the LTL market that they were finding significantly lower purchase rates. Did you see the same between a normal shipper in the 3PL side? Did you see that bifurcation between pricing?
About 35% or more of our revenue is with 3PLs. And so when you look, obviously, if that were the case, that probably had more of a negative implication on what our reported revenue per hundredweight is. But the way we deal with 3rd party logistics carriers is over the long run has been that we want to make sure we understand the freight that we're hauling. And it's more of a strategic relationship and partnership if you will. And we don't look and go after transactional type business that we try to bring into the system with them and where price may be moving more up and down.
That's we want to understand the customer that they're out and bringing to us what those shipment characteristics are. And then we put the pricing in place that can be profitable for us and meets our margin objectives. And I think they can help us and we can help them as well.
And John, I'll just add to that that in our relationships with our 3PLs, we have not seen an increase in activity from them coming to us trying to beat us down on price. That has not happened. They're always price conscious trying to do the best they can for their customer, but we've not seen a step up in activity from the 3PLs, those who visit us regularly.
Okay. All right. Thanks for the color.
I really appreciate the time.
Next is Scott Group with Wolfe Research. Please go ahead.
Hey, thanks. Good morning, guys. Good morning, Scott. Adam, just back to the tonnage in April for a second. I know there is some noise with Good Friday.
And so just as we think about that and the comps, what's a good kind of tonnage number to put in the model for Q2?
Yes. I guess we aren't ready to roll out any guidance in terms of what our tonnage expectations are. But we made the comment that we thought April would be a little bit stronger than it's been. And it's just it's underneath. But when you go again go back to sort of 2,005, 'eight and 'thirteen when you had that same Good Friday occurring in the Q1 in March, we would have expected to see growth more in that 2.5% to 3% range over March and it's more of in kind of the flattish range right now.
So it remains to be seen with what the economy is doing. But I think we like David mentioned earlier, we are encouraged by the fact that the ISM started increasing. Generally, there's a couple of months lag with that. Industrial production was down last year. And so any kind of improvement we see in that industrial economy obviously would bode well for starting in May June.
So we'll have to just keep in touch with that. And then obviously, we'll continue to put our mid quarter updates out and we'll give our May tonnage once we finish that period.
Okay. I know a bunch of people have already asked about headcount, but and I know you guys are saying you're going to do you're looking at the deal, you're going to do whatever you can. Should we is it possible that we can get headcount to kind of flat year over year excluding the drayage change? Or is that something you want to be doing to get tonnage back in line with obviously, to get headcount back in line with tonnage?
There may be some continued decrease in total full time employees. But keep in mind, our shipment volumes have been up. And so there should be on a year over year basis probably a continued increase. More importantly, what we can manage are hours as well. So we may have the people, but we may be working them less and sort of getting hours back in line as well.
So that number may vary. I don't think that sequentially that we'll probably be adding as many people in the second quarter as maybe in prior periods. But again, that's going to be based on the level of growth that we continue to see and we monitor every day.
Okay. And then just one more if I can. In the past, you've talked about the 20% to 30 sorry, 15%, 20% incremental margins. And I'm not sure that's the right way to be thinking about the model right now with flattish kind of tonnage. Maybe so just maybe think about operating margins.
Can we improve operating margins without tonnage growth right now? Or I guess, should we be expecting margins to continue to see a little bit of pressure in the next few quarters until tonnage turns positive again?
Yes. I think that 20% that we talked about last quarter is the right number to be thinking about long term for us. And when you get into long term margin improvement, what we've talked about in the past is you need improving density and improving yield and you need the macroeconomic environment and the pricing environment to contribute to those factors. And so right now, we just don't have all of those factors working in harmony or at least we didn't in the Q1. But with the investments that we've made, some of our fixed costs can become a higher percent overall as revenue and can be a headwind when revenues are not as strong.
And frankly, we just we need a little bit more contributing factor from the economy, I think.
Okay. All right. Thank you, guys.
Just on it.
We'll go to Todd Fowler with KeyBanc.
Great. Thanks. Good morning. Just on the increase in the operating ratio here from the Q1 of last year, Have you taken a look or do you have any sense of how much the impact of Easter might have been on the OR year over year? And then same sort of question, how much fuel might have hit the OR year over year in 1Q?
We don't necessarily try to quantify any impact from Easter and what that may have meant on vacations and work and things like that. But the fuel continues to be a headwind I would just say as that continues to decline. I mean we dealt with it all last year and you need to deal with it this year. What it is, it's a component of revenue and as it comes down, it obviously has a deleveraging effect on other things. But it was the key driver in that 200 basis point improvement in the operating supplies and expenses.
But overall that goes into all your direct costs and those are doing good. It's just a matter of right now our fixed costs are becoming a higher percent of revenue as the revenue levels have been a little bit softer.
Okay. Yes, that makes sense. And then just with the non LTL revenue, have you exited all of that here in the Q1? So is the run rate that you're at in 1Q, is that what we should think about throughout the rest of the year? And then can you also maybe just talk a little bit about strategically why you made the decision to get out of some of those services?
I'll have Adam can talk about the run rate, but I'll just touch on the three services. I want to point out though that our non LTL services are less than 2% of our total. So it's not the key driver of the company at all. It's a small portion. The drayage, starting off of that, we shut down some underperforming locations on the West Coast and Chicago.
And we've had, as we all know, a decrease in imports and a decrease in exports. So and some fairly significant price competition in that area. So that has impacted our revenues in dredge. 2nd piece is ocean freight forwarding. We had an in sourced operation with our own people managing our ocean forwarding.
We chose to outsource that model in a new partnership with Mallory Alexander. And by the way, that's going real well. But we've seen where
we were
booking the entire revenue from port to door and we were also booking purchase transportation piece. And if we were doing the drayage, purchase transportation with an owner operator for the drayage piece. And so we've seen that gross revenue and PT go down and we're earning we have a commission arrangement on the loads that we're outsourcing through Mallory now. And the last piece of non LTL would be our truckload brokerage. And it's down I think primarily due to the macro environment and truckload demand being down.
But the good news is that the profitability is up on that. We're making some better margins on our truckload brokerage. And those would be kind of what's going on in those areas. And as far as the run rate is concerned, Alan? Yes.
I mean it's normalized now, Todd. It was about $13,000,000 of revenue in the Q1. The 4th quarter was pretty normalized as well. It was although we still had a little bit of revenue there, the 4th quarter was about $14,500,000 of revenue.
Okay. That helps. And then just one last one if I could. Just on the share buyback, would the expectation be that the order of magnitude is somewhere similar to the $200,000,000 that you had previously? Or if CapEx comes down, could you do something greater than the most recent comes down, could you do something greater than the most recent authorization?
I mean, we're I guess I don't want to necessarily comment on that until we take our recommendations to the Board and get full approvals. And once that happens, we'll obviously we'll publish that. But you can look and see, I think we stepped up our buy in in the Q1 in comparison to what we've done in the past. So we're purchasing about $45,000,000 and we've already stepped up our buy in in the Q2 as well. And some of that was we've got a 10b5 program going, but it's also opportunistic as well.
And when some of the our share price was lower in the Q1, that was when we took advantage of that and stepped up that plan. So I think overall though, we feel like we've got a really strong balance sheet that will continue to allow us to invest in our LTL business and continue to grow that where we've really enjoyed healthy returns. We'll continue to discipline, but we'll continue to take looks at mergers and acquisition opportunity. But what we just finished is looking at ways that we can return capital to our shareholders to really improve the total return on our share price.
Okay. Thanks a lot for the time this morning.
Next is Rob Salmon with Deutsche Bank.
Hey, good morning and thanks for taking the question. I think, Adam, when you're talking about the market share gains that Old Dominion has experienced and clearly we're seeing that with your shipment growth relative to peers out there. You had mentioned kind of a couple of big customer losses as well within that sense. Can you give me a what drove that? I what drove that?
I'm assuming it was on the pricing side, but any additional color would be helpful.
I mean, we obviously have customers that come and go when we did have a couple of big ones that we lost and those were probably more pricing driven than anything else. But we always evaluate customers and we do we go through a bid process and our costing department is doing that every day. And I think that our win percentage on the bids that are coming through have been consistent with what we've seen in the past. But we obviously will continue to evaluate those. But those are having a or had an impact in some of our Q1 trends.
Okay. So it would have been toward the end of the quarter or I'm assuming it was after January, but I'm just trying to bifurcate potential impact from that versus the economy softening up a little bit?
Yes. I mean, it sort of it doesn't just all go away at one time. So it was somewhat happening, happened probably more of it was felt towards the end of the quarter.
But again, we have nearly 90,000 unique shippers every month and our largest customers are less than 2% of our business and we only have a couple that make even 2%. And then it's 1% on down to very small percentage of our business. So we just only made the comment that we've seen some pricing pressure
out there
in the field on a couple of our large accounts and not that they had a significant impact on the quarter. What you saw primarily is the impact of macro economy on the quarter.
No, I understand. I guess as we're thinking about the variable costs there, I would imagine there'll be a little bit of a short term headwind as you adjust the network to reflect kind of some of those customer changes that we're seeing.
On the specific locations that handled these specific accounts, we took cost out for the pickup and or delivery cost. But as that freight flows through a network, you can't get rid of the cost when the shipments are scattered and moving all throughout a network on trailers. You do to a degree maybe, but you can only control the controllable the real direct controllable cost and we did take cost down.
No, it
makes sense. And clearly, we're seeing it in the margins. So thank you.
I mean, we've seen accounts that were operating for us, large accounts that were kind of marginal on the OR like high 90s being taken away for a 25% or 30% discount off of our net charge. And we're not going to haul something at 120, 130 operating ratio.
No, it makes sense. Not certainly when your OR is at 85.9 percent. Nice results in a tough environment. Thanks guys.
You're welcome.
Next is Ari Rosa with Bank of America.
Hey, good morning guys. First question, just wanted to ask about the ELD mandate. We heard some positive commentary from a lot of the truckload guys in terms of expectations for second half, maybe boosting pricing a little bit and being a little bit more supportive of the large national carriers who are already ELD compliant. Just wanted to see if you guys are seeing the same thing on the LTL side?
I think the ELD mandate is going to have more of an impact on the truckload industry. Most of the LTLs,
not all
have some kind of an ELD in their trucks. There are a couple of the LTLs and you might want to ask when they make their have their earnings calls where they are with ELDs. But we put them in our trucks nearly I don't know, it's 2010, 6, 7 years ago, we put them in the trucks and we are totally compliant and ready to roll. And if somebody has a headwind because they don't have them in their trucks, we'll haul the freight.
No, no.
Well, I understand that you guys have it. I just meant more in terms of kind of industry wide. Is there a chance that, that then reduces the amount of capacity or the available capacity? But it sounds like that's not really the case.
I don't think so in the LTL sector.
If it reduces capacity in truckload, obviously, that could be an opportunity of freight to shift into LTL mode. Yes. That's true, Adam. You're right.
Okay, great. And then the second question, just wanted to get a little bit of commentary. If you guys are seeing any major differences between geographies or customer types?
No, it's really across the board. The only geography things that we're seeing would be in the states where the energy sector has an effect like Texas and the creditors in Montana where the oil and gas industries have been impacted.
Okay, great. Thank you.
We'll now go to David Campbell with Thompson, Davis and Company.
Yes. Good morning, everybody. Thank you. Your commercials on TV are very good, I think. They seem to have increased a lot in the last 6 months.
Where are those where is the expense for those commercials on the P and L? In
G and A cost.
In depreciation and amortization?
General and administrative costs. General and administrative, okay.
Would that be an area that you'd cut back in case the economy doesn't improve?
It's certainly an area that could be cut back, but a lot of those are negotiated for the upcoming year under a contract basis and you cannot cut them back.
Okay. And finally, my last question is on has your expedited tonnage been like the your other LTL tonnage? Has it been relatively flat?
Expedited for us is I mean we roll that into basically our reported numbers for LTL and it's a premium service offering for the LTL business and we continue to do well in that area. Generally, it a lot of times follows our other trends.
Mike, so it's pretty much the same as your other types of services.
Next is Art Hatfield with Raymond James.
Hey, good morning. Thanks for taking my questions. I'll try and be quick, David and Adam. David, just a quick question back on pricing. I know you've kind of beat on this, but I thought I heard in one of your responses that one of the things that you may be seeing as well is just not pure price cuts, but customers basically trading down to a lower cost service level.
Is that a fair way to think about it?
I think historically, whenever the economy has gotten soft, that shippers generally come more price conscious as opposed to service conscious. When things are going stronger, they shift back the other way. And so if you're a shipper and you feel like you can save a buck and your boss is saying you're the traffic manager and your boss is saying save us some money, they could be under some pressure to put some of their freight on a lower cost alternative. That's something we cannot measure. I'm just saying kind of anecdotally that that could be happening a little bit.
And that historically, if we look at how we've gained market share over the years in times when the economy was tougher, our rate of gain of market share has been less. And when the economy turns around, it gets strong. Our rate of gain of market share is stronger. So that's kind of what I'm alluding to there.
That's very Adam, I'll add the challenge that we have is to make sure and we've seen this happen in the past that we go into those shippers and demonstrate the added value of our service. So if you're comparing an invoice or list price from us versus a competitor, if you've made some type of shift like this, what has your on time service been? What has your cargo claims been? What have chargeback been. So when you look at basically their internal expenditures, how does that really compare from 1 versus the other and have they really generated any sort of savings on a total cost of ownership basis.
That's very helpful. Thanks for that color. Last question, just real quick. As you look at where you sit relative to your competitors, have you seen any change or any narrowing in the service gap where you sit relative to what your peers have been any improvements they've been able to put into their network and their services?
We continue to focus on ourselves and getting better every day and we're proud of winning this Mastio award for 6 straight years. And so I don't necessarily think that our competitors are sitting still, but I know that we aren't either. We're looking every day at how can we make improvements to our own service and business model and how can we make sure that our cost structure is set up that our pricing can continue to be fair for the service product that we offer.
Thanks for the time today. Great. Good help. Thanks.
And we'll now to Willard Milby with BB and T Capital Markets.
Hey, good morning, guys. Just kind of looking at quarterly trends, historically, you've been able to improve the OR about 3 50 bps Q1 to Q2. With the market the way it is and the way you're seeing April kind of not live up to expectations, it doesn't seem like that's feasible for this 2Q. Just wondering if you had any comments around that?
None specific, Will, other than what we mentioned earlier that a lot of that is based on what that improvement is based on what sequential trends and growth from a revenue standpoint is as the revenue was building in those periods and getting leverage on our fixed costs. Leverage of the density. That's right.
All right. And just a few quick housekeeping things. Did you give March's yield ex fuel to 3.4?
March
3.3% revenue per hundredweight ex fuel. All right, great.
And you said contract renewals are for Q1 were between 3% 4%? Yes, we continue to
see our renewals in that 3% to 4% range and that's really what we believe we will continue to see as we progress through the years. We haven't made any changes in that regard for what our expectation would be. All right, great.
That's it for me. Thanks. Thank you.
And there are no other questions. I'd like to turn it back to Mr. David Congdon for any additional or closing remarks.
Thank you all for your participation today. We appreciate your questions and your support of Old Dominion and feel free to give us a call if you have any further questions. Thank you and good day.
And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.